Airline outlook differs by region

Source:
This story is sourced from Airline Business
Subscribe today »

The outlook for the global airline industry could be described as mostly cloudy with occasional sunshine as high oil prices and the economic downturn take their toll on different regions in different ways. This year's Airline Business world airline rankings showed that carriers in all regions enjoyed a strong year in 2007, with the top 150 carriers combining to post a record $22.2 billion net profit and a record $29.2 billion operating profit.

The previous bests in the 14-year history of the ranking were in 1997, when a $9.3 billion net profit was recorded, and 2006, when a $20.4 billion operating profit was posted. But the forecast for this year and 2009 is markedly less optimistic, particularly for airlines in Europe and the USA.

weather
 © Rex Features

"The US is close to recession but some parts of the world look a lot stronger," says IATA chief economist Brian Pearce. "The silver lining to the storm cloud is that there are areas of the world where economic growth is proving far more robust than in other cycles."

For instance, Asian carriers had an outstanding year in 2007, and while analysts expect profits in this region to fall in 2008 they do not see airlines collectively dipping into the red. "The Asian carriers are in a much better position than the US and European carriers," says Morgan Stanley Singapore-based analyst Chin Lim. "The intra-Asia and Asia-Middle East markets are still very strong. Traditionally when the US is weak Asian carriers go to intra-Asia. As long as China doesn't collapse they will be OK."

Carriers in the Middle East are also in relatively good shape despite the record oil prices. Analysts say local demand, driven by oil-based economies, remains strong. As a result, airlines from the region are able to increase fares and fuel surcharges while continuing to add capacity. "With these oil prices there is an impact to the earnings for all carriers, but the Middle East carriers better than anyone else can pass it on," says ­London-based Citi analyst Andrew Light.

Dramatic Change

Analysts in Latin America are predicting that this region could also find itself in one of the sunny spots this year, buoyed by double-digit demand growth. But this is more than can be said for the US carriers, which are facing a much bleaker forecast. "The picture is going to change dramatically this year," says US airline consultant Darryl Jenkins. According to Bob Mann of US consultancy RW Mann, the first half of 2008 has "seen carriers running losses", while the third and fourth quarters "will be a transition period" as domestic capacity is slashed.

"In the fourth quarter, hopefully we'll see some stabilisation," says Mann. "Carriers are burning cash at the moment and the hope is that they stop bleeding cash in the fourth quarter. But this depends on what the US economy does and what jet fuel prices end up being, so we'll have to wait and see. The risk is that if carriers continue to burn cash, a number of them will reach a reduced cash point where the only option is to restructure, and this will likely end up in liquidation."

Europe is also facing tough times ahead, following a strong 2007. "For most airlines 2007 was a pretty good year. There was reasonably good demand," says Chris Tarry, chairman of UK-based CTAIRA. "But what goes up has come down and it has come down with a vengeance. The real issue now is how you suddenly change your view from everything going up to what you're going to have to do to survive."

Capacity discipline on a scale not seen before in Europe will take place as carriers attempt to weather the storm, according to David Henderson, manager information at the Association of European Airlines. "Lots of individual routes and clusters of routes have fallen into the seriously unprofitable category," he says. This has triggered a half-year re-planning process, with plenty of capacity cuts. This is more or less unprecedented in Europe. I don't know what kind of traffic and capacity picture we'll see in the winter but if this carries into 2009 we will see a highly unusual picture next year."

Light adds: "The important thing is to reduce capacity to maintain pricing power, which is what the US guys are doing. The Europeans as a group will have to do something similar."